Global central banks set to dump £100bn of sterling in hard Brexit

Central banks holding sterling as part of their foreign exchange (forex) reserves could sell more than £100bn (€109bn) of the currency should Britain crash out of the European Union without a trade deal, a Bank of America Merrill Lynch (BAML) study showed yesterday.

The prospect of a no-deal Brexit is becoming increasingly feasible in the eyes of investors who are hedging against the risk of the currency tanking if Britain is left isolated from the EU, its largest trading partner.

Such a huge currency sell-off would likely drive down the value of the pound against key peers including the euro and the US dollar.

This in turn would make it less lucrative to sell into the UK market for Irish suppliers, and harder for industry here to compete on price with British producers.

Yesterday, British Prime Minister Theresa May, inset, unsettled markets when she said a so called no-deal Brexit “wouldn’t be the end of the world”.

Central bank selling could be a major catalyst for a significant sterling downturn should Britain prove unable to secure a deal before next March, BAML told clients, noting that global sterling reserves currently amount to nearly $500bn.

While International Monetary Fund data shows sterling comprising 4.5pc of total central bank reserves, BAML said sterling’s average share of global reserves since 1995 was 3.6pc.

A one percentage point decline in sterling reserves equates to £100bn of selling, it calculates. “In a scenario that central banks adjust their sterling holdings back to the long-term average (3.6pc), this suggests that they could sell upwards of £100bn in sterling reserves on a no-deal scenario, all else being equal,” the note said.

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BAML still expects a “soft” Brexit in which Britain retains customs access to the EU, and said reserve managers would likely await confirmation of a no-deal scenario before making a portfolio shift.

“This [no-deal Brexit] is not our base case, but we think central bank flows are an important source of flow which could determine whether sterling succumbs to a more protracted current account crisis,” the bank added.

Meanwhile, Britain’s Treasury yesterday denied a newspaper report yesterday that the government had asked Bank of England Governor Mark Carney to stay on for an extra year beyond his scheduled departure in June 2019.

“We don’t recognise their reporting at all,” a Treasury spokeswoman said when asked about the article in the ‘Evening Standard’ newspaper.

A diary item in the newspaper said the ministry had “quietly approached” Mr Carney about staying another year to provide continuity as Britain leaves the European Union. “Our position is the same – we plan to start recruitment soon,” the finance ministry spokeswoman said.

Spokesmen for Prime Minister Theresa May and the BoE declined to comment on the newspaper report.

The value of sterling has fallen sharply since April as investors worry about the lack of progress in Brexit talks.

Mr Carney agreed to serve five years, rather than the usual eight, as BoE governor when he moved from his native Canada to Britain in 2013. In 2016, shortly after British voters decided to leave the European Union, he agreed to stay an extra year, keeping him in the job until June 30, 2019.

Mr Carney said in July he does not intend to change that plan. The ‘Evening Standard’ said government officials were struggling to find a candidate strong enough to replace him.

The person most tipped to be his successor is Andrew Bailey, a regulator with 30 years of experience at the BoE. He is currently head of the Financial Conduct Authority, one of the country’s main watchdogs for the financial services industry.

The ‘Evening Standard’ is edited by former Chancellor George Osborne who appointed Mr Carney to the BoE